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Updated about 8 years ago on . Most recent reply

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Nili Yosef
  • Rental Property Investor
  • Tucson, AZ
3
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35
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Security deposit question- has to be in a savings account?

Nili Yosef
  • Rental Property Investor
  • Tucson, AZ
Posted

Hi all,

Am i legally obligated to keep security deposits in a savings account? is this only if the property is under an llc or also if it's my name?

Thanks!

  • Nili Yosef
  • Most Popular Reply

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    Bill Gulley#3 Guru, Book, & Course Reviews Contributor
    • Investor, Entrepreneur, Educator
    • Springfield, MO
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    Bill Gulley#3 Guru, Book, & Course Reviews Contributor
    • Investor, Entrepreneur, Educator
    • Springfield, MO
    Replied

    A "Security Deposit" in any state is money deposited with one party to ensure performance as agreed, it is an asset to the one paying the deposit and a liability or contingent liability to the party holding the deposit.  A "Damage Deposit" is a Security Deposit as well.

    State law will govern the deposits and accounts necessary, as a landlord you are not entitled to deposits until they are earned by breach of contract terms. Funds that do not belong to you are not to be deposited in any "savings account" in your name, the proper account is an "Escrow Account". 

    Another rule is that you cannot commingle your money with funds of other's in an escrow account, such account should only have funds owned by others, you can commingle funds of others so you don't need separate accounts for each  tenant.  

    If interest is allowed in your state, your contract should state who is entitled to that interest, usually you can  say you are due interest for the maintenance of the account, if your state allows that.

    If you are entitled to interest, you need to keep track of that amount to make sure "your funds" as earned do not  exceed limitations under state law, if any, of having your money commingled in an escrow account, some states state no funds, which makes collecting interest difficult to be compliant.

    Don't confuse "Earnest Money Deposits" with Security Deposits, EM can be non-refundable and immediately collected by a seller. However, generally EM also goes to an escrow account held by the settlement agent for real estate closings. 

    A simple way to be compliant is to ask your banker, tell them the source of funds and they can tell you what type of account to use, if interest is to be paid, collected and managed.....that is asking a banker, or the accounts representative not a teller or secretary. LOL :)

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